Part B Theoretical Questions (33 marks) Question 21 (8 marks) Real Ginkgo, a large mining company and Rising Dragon, a small mining company both announced their record high profitability for the current financial year. The share price of Rio Gingko didn’t change after the announcement. On the contrary, the share price for the Rising Dragon increased by 20% after the announcement. How to explain this from Capital Markets Research perspective? The larger the organisation the more likely it is that there will be more information publicly available about the entity Larger firms tend to attract more attention from parties such as security analysts who are likely to spend the necessary time to find out about various things such as earnings projections, the market position of the entity, the performance of its competitors Because it is assumed, pursuant to the EMH, that share prices will reflect information from various publicly available sources, the larger the organisation (and hence the greater the alternative information sources) the relatively less the reaction of the market to accounting disclosures made by the entity Research shows that the relationship between the information content in earnings announcements and changes in share prices tends to be relatively more significant for smaller firms
Question 22 (9 marks) Brilliant Petroleum, a large multi-national company was recently involved in a serious oil spill incident. Its environmental reporting in both annual report and the corporate sustainability reports for 2012 increased significantly. How does the Legitimacy theory explain this? Legitimacy theory provides a view that corporations need to maintain ‘legitimacy’ in order to survive. Retaining legitimacy is dependent upon complying with community expectations, and the expectations of the community are considered to be embodied within the ‘social